Five Bank Failures Bring Year’s Total To 38 – FDIC Losses Top $1.9 Billion

Regulators had a busy week closing five banks in four different states on Friday.  Although bank failures have been proceeding at a slower pace than last year, the total losses to the FDIC Deposit Insurance Fund now top $1.9 billion and the number of problem banks remains very high considering that we are four years into the banking crisis.

The latest Problem Bank List from the FDIC at March 31, 2012 contains 772 banks representing 10.6% of all FDIC insured institutions.   Although the number of bank failures has declined from the previous year’s pace, the number of problem banks has declined by only 112 banks or 12% from the high of 884 problem banks reached at the end of 2010.  The historic low number of 47 problem banks was recorded in the third quarter of 2006 shortly before the banking and financial crisis of 2008.

Reasons why the number of problem banks remains historically elevated vary, but according to a study done by the Wall Street Journal, regulators are letting seriously undercapitalized banks remain open for much longer periods of time than in past banking crises.  This can also be observed by examining the financial statements of banks that are finally closed by regulators.  In many cases, the closed banks were severely undercapitalized with a slim or zero chance of ever being able to increase capital to regulatory standards.  A visibly weakening economy and very slow loan growth are further compounding the problem of dealing with inadequately capitalized banks that are unlikely to ever recover.

The five banks that failed this week had total assets of $738.6 million and the loss to the FDIC Deposit Insurance Fund totaled $151.3 million.  Although the FDIC has been able to bring the balance of the Deposit Insurance Fund above zero, it remains precariously small.  The FDIC is currently insuring a staggering $7 trillion in deposits with a fund balance of only $15.3 billion at March 31, 2012.  The deposit insurance fund has a razor thin reserve ratio of 0.22% – not exactly a comforting thought considering the precarious state of both the national and global economies.

Listed below are this week’s banking failures.  Please click on the link for detailed information on each bank closing.

The Royal Palm Bank of Florida, FL 

This was the smallest bank failure of the week.  Total assets of The Royal Palm Bank were $87 million.

Georgia Trust Bank, GA

Georgia is leading the nation in bank failures in 2012 just as it did in 2011 when 25% of all bank failures occurred in Georgia.

First Cherokee State Bank, GA

The second bank failure of the week in Georgia was also the largest bank failure of the week.  First Cherokee had total assets of $222.7 million.

Heartland Bank, KS

This 104 year old bank fell victim to the same plague besetting countless other banks – a huge amount of nonperforming loans.

Second Federal Savings and Loan Association of Chicago, IL

This was the second largest bank failure of the week but resulted in the biggest loss ($76.9 million) to the FDIC Deposit Insurance Fund.  In an unusual situation, the acquiring bank chose not to purchase the loan book of Second Federal, leaving the FDIC to deal with the mess of disposing of almost $200 million of failed bank assets.